A Co-ordinated Selloff

14 November 2018

Ani Deshmukh

RAM Active Investments RAM (Lux) Tactical Funds II - Asia Bond Total Return


October was characterized by a marked increase in volatility across asset classes globally, with both developed and emerging markets seeing a significant repricing across asset classes. Equities led the declines, as U.S. stocks, which had thus far held their ground in 2018, corrected sharply, reflecting valuation worries as well as peak growth/ late cycle concerns. The S&P500 saw its largest monthly decline since 2011, dropping 7% largely led by cyclicals (tech, banks) underperforming. EM equities also saw a significant correction as fears of a global selloff and slowdown intensified. The MSCI World Index dropped 8.1% encapsulating the extent of the selloff. Commodities dropped, with crude prices down 10% from their yearly highs. Credit markets in Asia, along with EM, also saw renewed pressures as rates concerns along with a stronger USD drove down valuations. USTs however remained sticky with the 10-year yields ending the month at 3.14%, wider by 7bps on the month. Credit performance in Asia was weak with the JACI down 1.15% for the month, due to a broad-based widening across all sectors and rating categories.

Looking ahead, the remainder of 2018 still has event risks that have the potential to stoke more volatility, beginning with the U.S. mid-term elections in early November, the Trump-Xi summit later in the month, oil price moves after (now partial) ban on Iran exports goes into effect and the Fed hike in December. We also expect supply to remain heavy, as both Investment Grade and High Yield issuers look to access the markets for refinancing needs as and when they get an issuance window. From a macro standpoint, what is also interesting is the divergence between USTs and equity markets. The volatility seen in equity markets in October was largely absent in the rates markets, while the recovery in equity markets over the last week or so is going hand-in-hand with a bid for USTs which are close their YTD lows. While valuations likely explain part of this divergence, over the medium term this suggests more risk aversion as global growth concerns in 2019 are in focus.

Looking at credit markets, the repricing we have witnessed are in line with what we have been expecting, and valuations are increasingly becoming attractive. In our view, the credit landscape is going through a range-shift as risk gets reassessed in the normalized rate environment. Spreads rather than all-in yields are a better indicator of risk going forward, and by that measure IG spreads are about 50bps wider on the year, and HY about 250-275bps, and over more value here compared to early-2018. We expect a gradual de-escalation of trade tensions as we go past the U.S. mid-term elections, and while liquidity remains tight, the credit markets may get a breather from a continued selloff if easing/ stimulus measures are implemented by China.

RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) was down 1.68% in October, bringing YTD performance to -4.88%. While the overall portfolio was defensive and outperformed the JACI in October, the PnL impact was due to one bond issuer (whose 2018 maturing bonds were part of the portfolio) witnessing difficulties in the refinancing, leading to a sharp decline in value. The Fund has since exited the position. As at end-October, the fund was ~ 70% invested in IG/ cash and near cash securities, and over 92% invested in short dated high quality bonds that offer good carry in this environment. With an average duration of 2 years, interest rate is also minimal and we intend to keep the portfolio diversified while selectively adding risk to help improve yield, which has moved up from 3.85% at the beginning of 2018 to 5.6% currently. The emphasis has been on adding risk selectively, without changing the overall defensive nature of the portfolio, and this would continue to be the key focus as we move through this correction and position for a more constructive 2019.

Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.

*Sources : Nexus Investment Advisors Limited